Smithfield Foods, Inc.

Oct. 1, 2012
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Corporate Profiles

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Farm-to-table vertical integration has been the hallmark of Smithfield Foods, Inc., Smithfield, Va., for many years. While the company’s control of its supply chain remains completely integrated, it has shifted its focus and strategic efforts toward building its packaged meats business.

Four elements comprise the company’s shift to focusing on packaged meats. The first is leveraging its portfolio of brands that include Armour, Curly’s, Eckrich, Farmland, John Morrell and many others.

The second element is the development of a robust new product innovation pipeline. New products introduced by Smithfield range from on-trend low-sodium offerings to deli meats and premium positioned packaged meats. Smithfield also is working to further bolster its new product pipeline with the opening of its $5 million research and development center that is designed to assist the company in being more responsive to consumer trends.

Smithfield Foods also has invested in reorganizing its sales and marketing efforts to be better aligned. Finally, the company is making investments in consumer marketing in an effort to raise its profile among end users.

Results of Smithfield’s shift in strategy began to show in June 2012, when the company announced its fiscal year-end results. Packaged Meats segment operating profit increased $50 million during the year to $400 million.

For the year ended April 29, Smithfield’s net income was $361.3 million, equal to $2.23 per share on the common stock, down from $521 million, or $3.14 per share, in fiscal 2011. Fiscal 2011 was the best year in the company’s history and fiscal 2012 was its second best.

Sales for the year were $13,094 million, an increase compared with fiscal 2011 when sales were $12,202 million.

“I believe that our packaged meats business affords us the biggest growth opportunities as we more fully evolve into a consumer packaged meats company,” said C. Larry Pope, president and chief executive officer. “We are gaining momentum in this business and remain committed to increasing our consumer marketing spending and building a consumer relevant product innovation pipeline to fuel this growth.”

Despite the opportunities Smithfield’s shift in strategy may afford it, the company’s vertically integrated business structure poses challenges. As feed costs rise, feeding the hogs that are the foundation of its packaged meats business becomes more expensive. For example, during fiscal 2012, hog raising costs increased 18% while improvement in live hog market prices during the year was only 15%. The company’s fresh pork business was also pressured during the year.

“The big packaged meats question mark is growth,” said Bo Manly, chief financial officer, when discussing the company’s fiscal 2012 results. “We have expended significant resources in the past year following pork group restructuring to manage volume growth while building margins. Market headwinds and higher raw material costs did not enable us to successfully execute both growth and margin initiatives.

“While we increased total operating profits by boosting overall margins and volume of core brands, we have not yet grown total tonnage. However, we are beginning to see a book of packaged meats business building in this first quarter and a new product pipeline that should translate to sustained year over year growth of 2% to 3%.”